Sentiment was hurt after market regulator Sebi directed bourses to initiate action against 331 suspected shell companies.
Benchmark Sensex slumped 260 points while the Nifty cracked below the crucial 10,000-mark on Tuesday as Sebi clamped down on 331 suspected shell companies listed on exchanges.
Investors were spooked after the markets watchdog last night directed bourses to initiate action against the suspected shell companies. These scrips will not be available for trading this month. Brokers said the order raised concerns of more such regulatory action.
A majority of these companies are apparently facing probe for alleged tax evasion and corporate frauds and have been referred by the Income Tax Department and SFIO to the corporate affairs ministry and Sebi for further action.
A number of these firms are from West Bengal.
The 30-share Sensex, which lost nearly 52 points in the previous session, resumed higher at 32,341.05 and advanced to 32,354.77 in early trade.
But selling pressure emerged as participants digested the Sebi order, which dragged the gauge below the 32,000-mark briefly to a low of 31,915.20.
The index finally settled at 32,014.19, a loss of 259.48 points, or 0.80 per cent.
The NSE Nifty dipped below the key 10,000-mark to close 78.55 points, or 0.78 per cent down at 9,978.55 after shuttling between 10,083.80 and 9,947.
"The Sebi order has taken industry and investors by surprise. This has led to erosion of serious wealth and if some of the companies are found to be not shell companies, this order shall still be a death knell for their perception and valuation," said Rajesh Narain Gupta, managing partner, SNG & Partners.
Foreign portfolio investors (FPIs) sold shares worth a net Rs 199.21 crore, while DIIs bought to the tune of Rs 308.15 crore on Monday, as per provisional data by the exchanges.
Dr Reddy's was the worst performer in the Sensex pack, losing 4.91 per cent.
Other laggards included SBI, ITC, ICICI Bank, NTPC, Power Grid, Axis Bank, ONGC, Maruti Suzuki, Hero MotoCorp, Sun Pharma, Kotak Mahindra Bank, Lupin, Reliance Industries, L&T, HDFC Bank, Infosys, Asian Paints, Wipro, TCS and HDFC, falling up to 2.33 per cent.
Tata Steel emerged as the top gainer by climbing 2.63 per cent after the company returned to profit in the quarter ended June 30, 2017.
In the metal space, Hindustan Aluminium, Nalco, Vedanta, SAIL and NMDC too showed some strength.
Among the sectoral indices, realty was the hardest hit, down 4.53 per cent, followed by oil & gas (2.16 per cent), PSU (2.08 per cent), power (1.88 per cent), FMCG (1.50 per cent), bank (1.34 per cent), healthcare (1.32 per cent), capital goods (0.93 per cent), teck (0.65 per cent), IT (0.60 per cent) and auto (0.39 per cent).
In Asia, Japan's Nikkei fell 0.30 per cent, while Hong Kong's Hang Seng rose 0.59 per cent and Shanghai Composite Index edged up 0.07 per cent.
European shares showed signs of weakness as Paris CAC dropped 0.20 per cent and Frankfurt's DAX shed 0.03 per cent in their early session. London's too FTSE fell 0.13 per cent.
Photograph: Danish Siddiqui/Reuters